It was the latter part of 2011 when we got a call from a couple living in New Hampshire. They had a child who was coming to Richmond to attend VCU and they wanted to purchase a small home or condo (no maintenance is a good thing for a college student).
They were betting that the market was at its bottom (which it probably was) and they were looking for upside.
One of the questions they was asked was, ‘If you were in our shoes, what would you do?’
It is one of my favorite questions.
What Drives the Market?
I have a personal theory that, as an agent, my primary job is to help clients understand the factors that drive the market. Clients who understand why values are what they are make confident and empowered decisions.
Larger market conditions — interest rates, employment, taxes — are all largely held constant and are beyond anyone’s control. Market values in the aggregate ebb and flow due to factors well beyond any individual’s ability to impact them. But if you make a good decision about your specific property, when the market rises, the value of your home rises more quickly. Conversely, when the overall market falls, your home’s value does not fall as quickly.
By focusing on hyper-local market conditions like nearby development, incentives, supply, and demand we help our clients acquire properties that are more likely to outperform the market, regardless of the direction it is moving.
All of these factors are easily recognizable to the trained eye. And while they can vary wildly from neighborhood to neighborhood and project to project, the key is understanding how these are likely to impact values moving forward.
Looking for Clues
Maybe it is our experience in project representation and development, but seeing upside in specific condo projects is relatively easy.
Keeping an eye on development, historic designation, the city’s Enterprise Zones, or zoning changes in a specific area is critical in spotting opportunity.
- RichmondBizSense.com on Scotts Addition
- Richmond.com on Scotts Addition Zoning Changes
- Scotts Addition Historic Lines
- Enterprise Zones — City of Richmond
When you follow the development market, seeing areas poised for price spikes becomes second nature.
Furthermore, condominium values tend to fluctuate more than single family, largely due to the impact of mortgage financing. Mortgage financing is more impactful than any other factor in condo values.
So when you see a) a condo project who recently regained its ‘warrantability’ (which is the industry term meaning ‘available for conventional finance’) or b) a project in a district experiencing intense development, it is a great buying opportunity.
Case Study — The Summit Lofts
In the mid 2000’s, the partners at Monument Construction, bought a small warehouse and converted it into 14 loft-styled 2 bedroom condos. The units were a good size — roughly 1,300 to 1,400 SF — and were nicely appointed. When they sold initially, most sold in excess of $200,000.
The neighborhood, Scotts Addition, had just been named a ‘historic neighborhood’ by the Department of Historic Resources, meaning that many incentives were now available to developers that made projects far more feasible. The historic designation is the number one accelerant for new development and once an area becomes designated, it is in very short order that a transformation begins.
Then 2008 happened.
Prices fell substantially in the Summit Lofts as several units were foreclosed upon and others became rental properties.
The condo lending rules changed substantially in the years following 2008’s crash. When conventional mortgage financing is no longer available, alternative forms of financing are required that are far less attractive (i.e. — higher rates, shorter terms, higher down payments). This suppresses values.
The Summit Lofts values suffered from both a lack of conventional financing and the loss of development momentum in Scotts Addition — but the fact remained that it was a nice property with good floor plans, nice finishes, and a soon-to-be phenomenal location. In other words, temporary factors had depressed values int he project and, once removed, values were likely to rise more quickly than the market as a whole.
So when our clients were looking for a place for their son, we talked about Summit and why it was a good bet. The development momentum was beginning again and the mortgage financing rules were being relaxed — meaning Summit Lofts now qualified for conventional mortgages.
- The condo was purchased for $143,000 in April of 2012 and sold for $169,000 in September of 2015. Its value increased by 18.2% (7.8% annually) during the time it was owned by our client. Not too shabby.
- The condo market overall in Richmond had a median sales price of $175,000 in the second quarter of 2012 and a median sales price of $189,000 in the third quarter of 2015. The market rose 7.6% (3.2% annually) during the same time.
And as you can see, their return on their investment was nearly 250% better than the overall market.
Why? Because they understood why the pricing was lower than it should have been and why it was likely to rise more quickly than the rest of the market.
We can tell many more stories about how we have helped clients acquire properties with upside as well as helped them avoid properties whose fundamentals are poor and values are likely to stay depressed.
Condos can be tricky animals and you need to understand the additional factors that underpin their market. As city markets tend to shift more rapidly as well, understanding how incentives can help drive values is also critical in making good decisions.
When you can spot fundamental changes in the inputs that drive values (financing, incentives, nearby development), you can find opportunities to out-earn the market.